Chapter 10 Au d i t i n g t h e Exp Ex p end en d i t u r e Cyc Cy c l e REVIEW QUESTIONS QUESTIONS 1.
Differentiat Differentiate e between between a purchase purchase requisi requisition tion and a purchase purchase order. order.
Response Response:: A purchas purchase e order order requisi requisition tion is completed completed by the inventory inventory control control departme department nt when a need for inventory inventory items is detected. detected. Purchase Purchase requisit requisitions ions for for offi office ce supp supplilies es and and othe otherr mate materi rial als s may may also also be comp comple lete ted d by staf staff f depart departmen ments ts such such as marke marketin ting, g, finan finance ce,, accou accounti nting, ng, and and pers personn onnel. el. The purchasi purchasing ng departme department nt receive receives s the purchas purchase e requisi requisition tions, s, and if necessar necessary, y, determine the appropriate appropriate vendor. If various departments departments have requisitioned requisitioned the same order, the purchasing department may consolidate all requests into one order order so that any quantity quantity discount discounts s and lower lower freight charges charges may be taken. In any case, the purchasing department prepares the purchase order, which is sent to the vendor, accounts payable department, and the receiving department (blind copy). 2.
What purpose does a purchasing purchasing department department serve?
Response Response:: A purchasing purchasing departmen departmentt is able to researc research h the quality quality and pricing pricing of various various vendors. vendors. Their Their job is to monitor monitor various various supply supply sources sources and choose choose the highest quality good for a given price which can be reliably delivered on time. The purc purchas hasing ing depar departme tment nt may also also take take advant advantag age e of quan quantit tity y discou discounts nts,, especially when two or more manufacturing facilities are involved. 3.
Distinguish Distinguish between between an open accounts accounts payable file and a vouchers vouchers payable file. Respon Response se:: An open open accou accounts nts payable payable file contai contains ns all source source docume documents nts,, includin including g invoices, invoices, organized organized by payment date. date. As the due dates dates become close to the curr current ent date, date, the invoic invoices es are pulled pulled from from the file file and and paid. paid. Under Under the vouch voucher er syste system, m, the accou accounts nts payabl payable e cler clerk k prepar prepares es a cash cash disbu disburse rsemen ments ts vouc vouche herr upon upon rece receip iptt of all all sour source ce docu docume ment nts. s. Each Each cash cash disb disbur urse seme ment nts s voucher voucher represents represents payment payment to one vendor. vendor. Multiple Multiple invoices invoices may be paid with one voucher. The voucher system system allows better control over cash cash disbursements disbursements since cash vouchers are assigned and tracked.
4.
What are the the three three logical logical steps of the the cash cash disbursem disbursements ents system system? ?
Response: The three logical logical steps of the cash disbursements disbursements system system are: a) authorization authorization of cash disbursements disbursements for payment. payment. b) preparation preparation & distribution distribution of checks, checks, and c) prepar preparati ation on of summa summary ry infor informat matio ion n by cash cash disbur disburse semen ments ts and accou accounts nts payable and sent to the general ledger clerk.
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5.
What general ledger journal entries are triggered by the purchases system? From which departments do these journal entries arise?
Response: Accounts Payable: Inventory Control Accounts Payable Cash Disbursements: Accounts Payable Cash 6.
Debit Credit Debit Credit
What two types of exposure can close supervision of the receiving department reduce?
Response: The receiving clerk's responsibility is to inspect the quantities and condition of the goods received. The two exposures are 1) failing to perform his/her duty and 2) pilfering or stealing the inventory. Thus, the copy of the purchase order which they use for this inspection should not contain quantities or amounts. If the quantity is printed on the receiving clerk's copy of the purchase order, he or she may be tempted to skip the physical inspection and the company may be paying for inventory it did not receive or is damaged. A supervisor is necessary to remove the packing slip which contains quantity information and to make sure the receiving clerks actually inspect the goods. If the value of the inventory is listed, the employee may be tempted to steal some of the inventory. Close supervision should deter employees from stealing. 7.
How can a manual purchases cash disbursements be re-engineered to reduce discrepancies, be more accurate, and reduce processing costs?
Response: By using a computer system to automatically search the accounts payable files, early payment discounts will not be overlooked and potentially lost. Checks are printed, signed, and distributed. EDI partners may receive their payments electronically reducing check printing costs. The updates to the check register file, accounts payable files, and general ledger are automatically made, thus cutting down on clerical work and errors. 8.
What steps of independent verification does the General Ledger department perform?
Response: The general ledger department receives journal vouchers from inventory control, accounts payable, and cash disbursements. With these summary figures, the general ledger clerk verifies that 1) total obligations recorded = total inventories received, and
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2) total reductions in accounts payable = total disbursements of cash. 9.
What is(are) the purpose(s) of maintaining a valid vendor file?
Response: Inventories should only be acquired from valid vendors. This control procedure helps to deter the purchasing agent from buying inventories at excessive costs and receiving kickbacks or from buying from an entity in which the purchasing agent has a relationship, such a relative or a friend. 10.
How do computerized purchasing systems help to reduce the risk of purchasing bottlenecks?
Response: Routine purchases can be automated, thus reducing the time lag between the purchase requisition and the placement of the order, which also reduces the amount of time to receive the inventory. Thus, routine orders which may be automated should cause the ordering processing time to be reduced. 11.
What is a personnel action form?
Response: The personnel action form provides the payroll department with a list of currently active employees, so that any submission of time cards by supervisors for fictitious or ex-employees will not be processed. 12.
What tasks does a payroll clerk perform upon receipt of hours worked data from the production department?
Response: The payroll clerk reconciles the information received from personnel and production, calculates the payroll and distributes the paychecks. Further, the payroll clerk sends summary information to the accounts payable clerk. 13.
What documents are included in the audit trail for payroll?
Response: a. time cards, job tickets, and disbursement vouchers. b. journal information which comes from the labor distribution summary and the payroll register. c. subsidiary ledger accounts (employee records and expense accounts). d. general ledger accounts (payroll control, cash, and payroll clearing).
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DISCUSSION QUESTIONS
1.
What is the importance of the job ticket. Illustrate the flow of this document and its information from inception to impact on the financial statements.
Response: The job ticket is used to allocate each labor hour of work to specific WIP accounts. These job tickets are very important for cost accounting. The job tickets are completed by production workers as they capture the total amount of time that they spend on each production job. Upon completion, they route these to the cost accountants who use them to post the labor costs to specific WIP accounts such as direct labor, indirect labor and overhead. The cost accountant prepares a labor distribution summary which contains the information for the general ledger clerk to make the necessary entries to the general ledger accounts. 2.
What three documents must accompany the payment of an invoice? Discuss where these three documents originate from and the resulting control implications.
Response: The three documents which must accompany the payment of an invoice are the purchase requisition, purchase order, and receiving report (in addition to the invoice itself). The purchase requisition originates from inventory control and represents the inventory requirements. The purchase order originates from the purchasing department and represents an order placed. The receiving report originates from the receiving department and represents the quantity and types of goods received. Thus, the accounts payable must determine 1) that the goods ordered were requested by some department (i.e. inventory control) other than purchasing, 2) that purchasing ordered the goods from a valid vendor, and 3) that the goods were actually received. If all three of the conditions are met, then and only then should the invoice be paid. Further, only those goods received in good shape should be paid. 4.
Discuss the importance of supervision controls in the receiving department and the reasons behind "blind" fields on the receiving report such as quantity and price.
Response: The receiving clerks have access to many of the firm's assets: their inventory. Two exposures potentially exist: 1) the clerk failing to perform his/her duty and 2) the clerk pilfering or stealing the inventory. Thus, the copy of the purchase order which they use for this inspection should have the quantities and amounts covered so that they may not be read. If the quantity is printed on the receiving clerk's copy of the purchase order, he or she may be tempted to skip the physical inspection and the company may be paying for inventory it did not receive or is damaged. A supervisor is necessary to remove the packing slip
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which contains quantity information and to make sure the receiving clerks actually inspect the goods. If the value of the inventory is listed, the employee may be tempted to steal some of the inventory. Close supervision should deter employees from stealing. 5.
Why do the Inventory Control, Cash Disbursements, and General Ledger departments appear to "disappear" in computer-based purchasing systems (Figure 5-14)? Are these functions no longer important enough to have their own departments?
Response: These functions are very important, and that is one reason why they are automated. Theses functions are crucial and thus automation can help to increase efficiencies and reduce clerical errors. The inventory control department no longer has to keep track of the records to determine if inventories are at the reorder point. The system will monitor the levels and flag any items which need reordering. Thus, the chance that an item is overlooked is eliminated. The entries for the general ledger are automatically created by the system, thus errors are reduced since transcription from summary reports into the general ledger is not necessary. 6.
How does the procedure differ between a basic batch processing system and a batch processing with real-time data input of sales and receipts of inventory. What about for the procedures used by the receiving department?
Response: A system which employs real-time data entry of sales will have the inventory levels updated more frequently. Thus, when a sale depletes the inventory level to the reorder point, the system will flag it for reorder more quickly than if it had to wait for a batch update of the inventory records. The sooner the item is ordered, the sooner it will be received. With respect to the real-time receipt of inventory, the inventory will be updated immediately to show the accurate amount which is on hand. Thus, a customer wishing to know how soon they may have an item shipped will receive more accurate information regarding the status of the firm's inventory levels. Thus, the customer benefits from better stocking of inventory and better information regarding the inventory levels. The receiving departments uses real-time data entry; they enter the purchase order number and a receiving screen prompts the clerk for the quantities of goods received. This system should cause less discrepancies due to poor handwriting, carelessness, and loss of the receiving report form. 8.
Discuss the major control implications of batch systems with real-time data input. What compensating procedures are available?
Response: The first control implication is that a fundamental separation between authorization and transaction processing no longer exists. The computer programs both authorize and process the orders and issue checks to the
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vendors. The compensating control is to provide transaction listings and summary reports to management which describe the automated activities taken by the system. In order for these controls to work, the managers must take the time to carefully review these reports. The second control implication is that the accounting records as well as the computer programs reside on magnetic disks. These disks should not be accessed by any individuals not authorized to access them in any fashion. The compensating control is to employ hardware, software and procedural controls over the data stores. 9.
Discuss some specific examples in which information systems can reduce time lags and how the firm is positively affected by such time lags.
Response: One example is the reduction in the time it takes to record the receipt of inventory into the inventory records which are used to inform customers whether their requested item is available. Also, the inventory levels are also reduced more quickly for those inventories which are being shipped and are a reduction in the inventory levels. With reduced time lag, the risk that an item will be promised to be shipped to another customer when it is not available is greatly reduced. Further, the automated system will be less likely to pay an invoice too early, while at the same time not missing the discount period. Thus, cash management is improved. 11.
Payroll is often used as a good example of batch processing using sequential files. Explain why.
Response: Sequential files are appropriate because most if not all payroll records on the master payroll file are updated during the payroll processing run. MULTIPLE CHOICE
1. 2. 3. 4. 5. 6. 7. 8.
B A C B D C B D
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PROBLEMS (May no t be the same as the cu rrent text)
I.
Explain how the processing procedures would differ, if at all, for the transactions listed in problem 1 above if a computer-based system with a) a basic batch processing system were implemented, b) a batch processing system with real-time data input.
Response: a) The entire inventory file would be searched at certain intervals, maybe twice a day, by the computer to identify items at or below their reorder. The computer would also check the quantity on order field to determine if an order has already been placed. If an order is needed, the computer creates an open purchase requisition record. The vendor file is also needed at this point. The purchase requisition is sent to the purchasing department to fill out a purchase order (some systems may automate this also). The purchase orders for a certain period of time, maybe daily, are accumulated and processed together in a batch and any open purchase requisitions which have a corresponding purchase order are closed by the system. The receiving reports are accumulated over a period of time and processed together, at which time the inventory is updated on a batch basis, as well as the open purchase orders. Any purchase orders which are filled are then closed. The vouchers are accumulated over time and processed together in a batch and recorded in the voucher register. b) If the system is processed with real-time data input, the inventory is automatically scanned whenever a withdrawal from an inventory account is made. If the item needs reordering, a record in the purchase requisition is entered. After a specified period of time, the purchase requisitions are consolidated according to vendor number. A valid vendor file is checked by the system, and a purchase order is created by the system. When the goods are received, the receiving report is entered into the system and the inventory account is automatically updated to reflect the new inventory items which have arrived and the logical field rec flag is set to true. When accounts payable receives the invoice, the files are scanned to match the invoice with an open purchase order, and the invoice field is set to true to indicate that the invoice has been received. The open purchase order is checked to determine if the goods have been received by checking the logical field rec flag . If no discrepancies are noted by the system, a record is created in the open accounts payable file. The system scans daily the accounts payable due dates to determine which invoices will be made. The system then prepares the checks, closes the corresponding accounts payable records and prepares a check register, and transaction listing.
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II.
Using the flowchart presented in the text of a purchases system, identify six (6) major control weaknesses in the system. Discuss each of the items that you identify. Be specific as to the class of the control problem in accordance with SAS 78.
Response: Auth orizatio n . The purchases function is not authorized from inventory control Acco unti ng Record s. Inventory records are updated based on the purchase
order rather than the Receiving Report or Invoice. Acco unti ng Records. The Accounts Payable Subsidiary ledger is updated based only on the Invoice. There is no reconciliation with supporting documents. Acco unti ng Records. There is no Cash Disbursements Journal or Check Register in use. Acco unti ng Record s/Segregation of Funct ions . The receiving department prepares the Receiving Report directly from the Packing Slip. A blind copy of the Purchase Order should go to the receiving clerk to control this activity. A supervisor should take possession of the packing slip that contains relevant data and oversee the inspection process. Acco unti ng Record s / Independent Verifi catio n. The General Ledger department should receive Journal vouchers or batch totals from Inventory Control, Cash Disbursements, and Accounts Payable. These are used to keep the General Ledger Control accounts current and to verify the overall accounting accuracy of the process. III.
Estimate the amount of money which could potentially be saved by the account payable and cash disbursements departments if a basic batch processing system were implemented. Assume that the clerical workers cost the firm $12.00/hour and that 13,000 vouchers are prepared and 5,000 checks are written per year. Assume that total cash disbursements to vendors amount to $5 million dollars per year. Due to sloppy bookkeeping, the current system only takes advantage of about 25% of the discounts offered by vendors for timely payments. The average discount is 2% if payment is made within ten days. Payments are currently made on about the 15th day after the invoice is received. Make your own assumptions and state them regarding how long specific tasks will take. Also discuss any intangible benefits of the system. (Don't worry about excessive paper documentation costs.)
Response: This firm processes approximately 52 vouchers/day and 20 checks/day. At a minimum, the firm would benefit from the purchase discounts which would not be lost due to sloppy bookkeeping: $5,000,000 * 75% = $3,750,000 * 2% discount = $75,000 savings per year Even after deducting for any interest lost at 5% on the funds which remain in the bank the extra 5 days: ($3,750,000*5%)*(5/365) = $2569. Thus, the net savings would be $72,431. An added benefit may be that one less worker is needed. If
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this is true, the savings would be approximately $25,000 before considering employee payroll taxes and costs of benefits. Other benefits would include fewer errors, and thus fewer vendor complaints and better control and reports over cash disbursements.
